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With inflation showing little sign of easing, the Federal Reserve is keeping interest rates steady in an effort to stave off the economy and bring inflation down to 2% (currently 3.4%).
While officials have not given a specific timeline for when they might cut rates, Susan M. Collins, president and CEO of the Federal Reserve Bank of Boston, believes 2% is important. But getting there may take time, Ms. Collins said.
“I am realistic about the risks and uncertainties but am optimistic that this can be achieved within a reasonable timeframe if labor markets remain healthy,” she said, reiterating that “there is considerable uncertainty about that outlook.”
“Looking at the recent data, I think it's going to take longer than previously thought and the policy path is not set in stone,” she said at an event hosted by the MIT Golub Center for Financial Policy on May 8.
Collins made the remarks during a discussion with MIT Sloan professor Christine Forbes. Here's what Collins had to say about inflation, interest rates, and artificial intelligence in finance:
Inflation Management
Collins is optimistic that inflation can be brought down to the Fed's 2% target, but acknowledges the difficulty of analyzing “noisy” data. Economic activity and the labor market are strong, but some components of the inflation rate (such as housing) are “sticky” even as other components (such as some goods) are rising at a slower rate.
“Monthly inflation numbers remain volatile relative to historical figures,” Collins said. “The unevenness of the deflation process is to be expected. While it's not entirely surprising to see some less-than-welcome news following a series of favorable inflationary developments, this is data that needs to be taken seriously.”
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Regarding interest rate cuts
The Federal Open Market Committee has raised interest rates 11 times in about a year and a half, raising the federal funds rate to a 23-year high of 5.25% to 5.5% since July 2023. The idea is that higher interest rates will improve the balance between supply and demand in the economy, helping to curb inflation.
“We have raised interest rates exceptionally quickly, moving the stance of monetary policy from very accommodative to tighter,” Collins said. “We are now patiently evaluating how long it is appropriate to maintain this target range.” To make that judgment, he is looking at the labor market, short-term and long-term inflation expectations, signs of deflation, and the stability of wages and prices.
Collins called current interest rate policy “moderately conforming” and said there were potential risks in cutting rates too quickly: “Doing so would make our job of restoring price stability more difficult and there are risks from keeping interest rates high for too long, leading to unnecessary economic disruption.”
Introducing AI into finance
AI is already being used in finance in many ways: generative AI tools, in particular, can analyze market trends, create predictive models, and perform compliance checks, and financial advisors are also using AI to create investment strategies for their clients.
Collins said AI is unlikely to be used to decide monetary policy, but it could be used to gather and understand information about economic trends — for example, economists could use AI to analyze large amounts of text from companies to create overall inflation forecasts.
“I think some of the real-time data is an example of something that will be very useful to us going forward,” Collins said.